VIX Trader Pays $8 Million on Bet Gauge to Rally 60% by May

Traders work in the Volatility Index Options (VIX) pit on the floor of the Chicago Board Options Exchange (CBOE) in Chicago, Illinois, U.S. Photographer: Tim Boyle/Bloomberg

March 18 (Bloomberg) -- An investor paid about $7.95
million for a trade that will pay off if the Chicago Board
Options Exchange Volatility Index rallies at least 60 percent by
May.

The trader bought 150,000 bullish contracts on the VIX
expiring in May with a strike price of 22, while selling the
same number of May 30 calls in a strategy known as a call
spread, according to New York-based Miller Tabak & Co. The trade
cost 53 cents to put on for each contract and it will profit if
the volatility gauge rises above 22.53 from the current level
around 14, data compiled by Bloomberg show. It has a maximum
payoff if the VIX more than doubles to 30.

“It was one of the largest VIX trades we’ve seen in a
while and an interesting way to put on a tail-risk hedge,”
Lillian Seidman, an options strategist at Miller Tabak, said in
an interview. “This is a play on the VIX shooting through its
high not seen for the last couple of years.”

The VIX, an options-based measure of the price to protect
against losses in the Standard & Poor’s 500 Index, soared 26
percent to 17.82 last week, while the benchmark equity gauge
fell 2 percent for the biggest drop in seven weeks on concern
that the standoff in the Crimea region between Ukraine and
Russia could worsen. Almost $1.7 trillion was erased from global
equities between March 6 and the end of last week, data compiled
by Bloomberg show.

Share Rebound

Stocks rallied today after President Vladimir Putin said
Russia wishes no harm to Ukraine. U.S. and European leaders
condemned Russia’s push to annex Crimea and promised further
sanctions as early as this week in the worst dispute since the
Cold War.

The VIX, which hasn’t closed above 22 since the end of
2012, slumped 7.2 percent to 14.52 today. The gauge has fallen
about 19 percent in the past two days for the biggest slide in
more than a month. The May 22 and 30 VIX calls were the most-traded options contracts across U.S. exchanges today.

“Someone’s opening a new position in these VIX options,”
Fred Ruffy, a Chicago-based senior options strategist at Trade
Alert LLC, said in a phone interview. “It’s a view that
volatility may spike over the next couple of months.”